Alfred M. Mthimkhulu
In January 2009, a financial crisis was still wreaking havoc in the Unites States. Some 9 million Americans had lost their jobs. The same number had slipped below the poverty line. Millions of homeowners had lost their homes to banks and banks themselves were gasping for survival. Lehman Brothers had filed for bankruptcy. In 80 years, things had never been this bad in the land of the free and the home of the brave.
President Obama had just appointed Timothy Geithner as Treasury Secretary to clean out the mess. “Leave the politics to me” President Obama had told him and Larry Summers, a former Chief Economist of the World Bank now in charge of the President’s National Economic Council. That of course was President Obama’s statement of confidence in his team.
“The president knew he couldn’t fix the broader economy without fixing the financial system” so reflected Secretary Geithner in his memoirs, “banks are like the economy’s circulatory system, as vital to its everyday function as the power grid”. This means that their foremost challenge was nurturing people’s confidence in the financial system. How were they going to do it?
Their plan was that the central bank would study all the financial institutions meticulously to determine the financial position of each. They called the exercise “Stress Test”. After the tests, government would have a good feel of the scale of problem and funds needed to ensure the power grid pumped life into the economy.
Banks found wanting by the tests had six months to raise capital, failure to which such capital would be injected by Treasury under stringent conditions. This was not nationalisation. Tax payers were to get their money back. As we know today, the plan and its sub-plans worked.
The land of the free and the home of the brave rose from ashes as it had done 80 years earlier and so many times in between and before.
But in January 2009, the recovery was way in the future. In the then here and now, Secretary Geithner delivered his maiden address. His speech was supposed to boost confidence but did the opposite. He told reporters in broad terms of the Stress Test. It didn’t help that the plan was being articulated by a seeming upstart with no record of policy making at that level and in the prevailing circumstances.
Of his address, a leading columnist remarked that from what the Treasury Secretary had said “we have a plan to have a plan”. The remark was just as bad as how Jim Rogers’ to Bloomberg: “Mr Geithner doesn’t know what he’s doing, and pretty soon, everybody’s going to find out.”
When Secretary Geithner got back to his team after the address, he apologised for the poor delivery and emphasised that henceforth the public would be updated weekly on the plan’s progress. In so doing, he hoped they would build confidence gradually.
As everybody knows, nurturing confidence begins with an explicit acknowledgement of citizens’ concerns. Thereafter, the concerns are addressed head-on. But citizens are not homogenous. They may yearn for the same outcome but prefer different paths. In the crisis he faced, most were against use of tax payers’ money to bailout banks. Banks, after all, had caused the crisis by lending recklessly.
Others wanted to see some relief being extended to traumatised homeowners whose houses were being repossessed. But such relief would somewhat filter to the bankers. His address only accentuated the divide in public opinion on how the mess could be cleaned. It didn’t help that he said “no more Lehman” meaning that there would be no more bank failures. It also didn’t help that he said he would mobilise up to $2 trillion to oil the financial market.
To many, he was bailing out his Wall Street buddies. He was just like his Republican Party predecessor Henry Paulson, a former executive of Goldman Sachs. Many were not impressed.
A few were. For instance, fund manager and billionaire David Tepper was persuaded by the plan. He bought a lot of banking shares during this time. To the few like him, the plan expressed government’s unequivocal will to fix things. Confidence was beginning to coalesce among such few. They made a lot of money from those banking shares.
Reflecting on his term, Secretary Geithner writes that “we did a lot of things that would be unthinkable in normal times in a capitalist economy”. Indeed, they did a lot of things that remain undoable in any progressive developing economy: injecting public funds into banks, boosting consumer expenditure through tax cuts and credits, providing comprehensive social safety nets — in short, rejuvenating the economy via facilities from treasury. As determined as any progressive global south economy can be in implementing typical IMF policies drawn by the likes of Larry Summers, we are yet to see success stories from such polices.
The thing is, Secretary Geithner and team were sole authors of their plan. They owned it. They executed it never yearning or hoping for external support.
In Africa and Latin America, the tradition is for economic recovery plans to be authored and executed with oversight from the World Bank. There is nothing wrong with that. What is unfortunate is that progress on building confidence is oft evaluated from external stakeholders’ perspective than locals.
We gloss over the reality that those that have waded the challenges we wrestle with perennially look almost exclusively within their internal capacities and evaluate their progress on feedback from own citizens.
We are upstarts in this game. We are learning. We just need to hasten the pace.